Posted in Marketing and Strategy Terms, Total Reads: 1050
Definition: Early Payment Discount
Early Payment Discount is a type of credit policy in which a discount can be availed if the payment is made before a specified time. Early payment discount is chosen by a seller only if its accounts payable department sees that the cost of credit is higher than the cost of capital.
For example, a supplier of drilling machines offers the company 2/15 net 40 payment terms. This means the supplier will allow a 2% discount if paid within 15 days, or a regular payment in 40 days. The following calculation is used to determine the cost of credit related to these terms: